When it comes to buying a home, borrowers would do well to abide by the motto of the Boy Scouts of America: be prepared. One of the best ways to do so is to get their pre-approval for mortgage before going home shopping. A mortgage pre-approval letter states that the buyer has received pre-approval for a home loan of a specified amount.
The pre-approval for mortgage process includes a review of assets, credit, and income documentation in order to establish how much a prospective buyer can afford to borrow. That amount is then certified for pre-approval, meaning that if nothing changes, the buyer should be able to close a mortgage on any property that meets the lender's requirements.
Pre-approval differs from pre-qualification in that the latter merely provides an estimate of how much one "should" be able to borrow, based on information provided by the homebuyer but not verified. In other words, pre-qualification does not guarantee that someone can be approved for a mortgage; pre-approval does.
Pre-approval Gets a Seller's Attention
Pre-approval before home shopping helps borrowers in two ways. First, it helps place buyers' focus on homes that are truly in their price range. Second, and more to the point, pre-approval can offer prospective homebuyers a leg-up over those who haven't been approved for a mortgage.
Nothing can squelch a house sale quicker than having to wait for credit approval. A pre-approval letter from a qualified lender acts like an express pass. Sellers pay attention to offers from buyers who are pre-approved for a home loan because the sale is less likely to be delayed or fall through due to problems with obtaining mortgage approval.
What's more, if buying a house comes down to a bidding war, the advantage goes to the buyer who has been pre-approved for a home loan.
Pre-approval Mortgage Requirements
Mortgage pre-approval is based on one's fiscal health and the state of his or her credit. During the pre-approval process, mortgage lenders ask for proof of income and verify the applicant's employment and credit rating. This means buyers submit documents like W-2 forms (proof of employment), copies of tax returns from the previous two years' filings, and statements from savings and investment accounts.
Borrowers should be prepared to address any gaps in employment and explain past glitches in their credit history. Self-employed borrowers can expect to provide additional documentation such as profit-and-loss statements and business licenses.
Once a purchase offer has been accepted, the lender will finalize loan approval after the property has been appraised.
When More Isn't Really More
Sometimes a lender may issue a pre-approval letter for a mortgage amount that is larger than the applicant anticipated. Those who are pre-approved aren't obligated to borrow the amount shown in the pre-approval letter. Pre-approval indicates how much someone can borrow, not how much the borrower is necessarily willing to spend.
Prospective buyers are the best judge of their financial goals and limitations. In the long run, buying a home with a lower mortgage and monthly payment than that indicated on a pre-approval letter can provide financial flexibility. And buyers should consider requesting pre-approval letters with amounts tailored to match their offers -- no point in letting sellers know that they could spend more.
Pre-approval Expiration Date
Letters of pre-approval typically remain in effect for 60 to 90 days. Unfortunately, that may not be enough time in some cases. Situations that can delay closing of a mortgage include short sales, purchases of homes under construction, the need to complete repairs before closing and the seller's desire for a longer escrow.
Buyers should forward their most recent documents -- pay stubs, bank statements and the like -- to their lender to keep their pre-approval in force through the entire escrow period and make sure they close on time.